Initial Public Offerings: Reforming the Process

Of Relevance to: IPO stakeholders including corporate finance advisers, investment banks, buy-side stakeholders and independent research analysts

In April 2016 the FCA published a Discussion Paper (DP16/3) on concerns it had on the availability of information in the UK equity IPO process – see Regulatory Roundup 75 for further information.

Following feedback arising from the Discussion Paper, the FCA is proposing changes to the IPO process in Consultation Paper CP17/5 “Reforming the availability of information in the UK equity IPO process”.

In addition to concerns expressed in DP16/3 – again please see Regulatory Roundup 75 for a summary of those concerns – the feedback received also suggests, or confirms, that:

  • Corporate finance advisers place significant pressure on analysts to produce favourable coverage if their bank is to secure a place on the syndicate
  • Even when an underwriting mandate has been secured, favourability of research can be used to determine a bank’s position in the syndicate
  • There is pressure on analysts across the syndicate to produce a single common view and forecasts
  • Certain practices are potentially inconsistent with the Market Abuse Regulation (“MAR”).

Proposals to counteract the FCA’s concerns include the need for the prospectus, or registration document, to be published before any connected research (i.e. research attributed to the syndicate banks) is released. The intention is to allow unconnected analysts access to the issuer’s management in the period between the issuance of the prospectus document and the issuance of the connected research.

The proposed rules will require a firm acting for the issuer to either ensure that a “range of unconnected analysts” are given the opportunity to join the firm’s analysts in any communication with the issuer, failing which the firm will need to ensure that the unconnected analysts are permitted appropriate communication with the issuer that would allow them to form a substantiated opinion about the issuer or the relevant securities. In the former scenario, the firm acting for the issuer is permitted to disseminate its research one day after publication of the prospectus. However, in the latter scenario, the time period is increased to seven days after publication of the prospectus.

The firm will be required to undertake an assessment of the potential “range of unconnected analysts” (which must be suitably documented) which will ensure that there is “a reasonable prospect” of enabling potential investors to undertake a better assessment of the offering. The paper acknowledges that this may raise some practical questions for syndicate banks on how unconnected analysts would be made aware of opportunities to be in communication with the issuer’s management and which analyst would be provided with this opportunity. The FCA also envisages working with trade associations representing both investment banks and independent research providers to develop ‘research guidelines’ for unconnected analysts. Those signing up to the guidelines would be established as part of a community eligible to be in communication with issuers in the context of an IPO.

COBS 12.2 (‘Investment Research’) will be tweaked to make it clear that the current guidance (COBS 12.2.9) that ‘participating in pitches’ is ordinarily inconsistent with a financial analyst’s objectivity will also capture a financial analyst interacting with an issuer to whom the firm is proposing to provide placing/underwriting services until the firm has accepted the mandate and the firm’s position in the syndicate has been contractually agreed.

As mentioned above, the FCA also has concerns about the traditional IPO process in the context of MAR – specifically how firms are justifying the possible disclosure of inside information in an analyst’s presentation is in compliance with MAR. It is commented that the completion of a non-disclosure agreement does not guarantee that disclosure of inside information is lawful in accordance with Article 10 of MAR (“Unlawful disclosure of inside information” – although there is an exception where the disclosure is made in the normal exercise of an employment, a profession or duties). Clearly here it is important that all persons in an IPO information chain have in place processes to identify whether the information they disclose, or receive, is inside information. The issuer will, of course, have its own obligation to make a public disclosure of inside information in accordance with Article 17 of MAR (subject to the delay provisions within MAR Article 17(4)).

One other aspect relating to market abuse is the need for issuers to consider whether any communications with potential investors may amount to ‘market soundings’ (MAR Article 11). If so then, provided that the correct process is followed, an issuer may be able to seek protection under MAR Article 11(4) (“disclosure of inside information made in the course of a market sounding shall be deemed to be made in the normal exercise or a person’s employment, profession, or duties” – see above). For the avoidance of doubt, the market soundings provisions also apply to a third party acting on behalf on an issuer.

For now the proposals only concern securities that are intended to be admitted to trading on a (UK) regulated market. However, one of the questions raised in the Consultation Paper is whether it would be appropriate to extend the proposed rules to IPOs on MTFs, notably AIM and NEX Exchange Growth Market.

The FCA welcomes comments on its proposals by 1 June 2017.

The proposed rules can be found in Appendix 1 of CP17/5. As far as MAR is concerned, the FCA will consider the need to issue formal guidance on the above market abuse related issues depending upon the feedback.

When reviewing CP17/5 and considering the impact on internal processes and procedures, IPO stakeholders are reminded that MiFID II also introduces requirements relating to the pricing of offerings, the placing of financial instruments, distribution etc. These can be found in Delegated Regulation C(2016) 2398 (Articles 38- 43), although please bear in mind that this Regulation is effectively still in draft – it is not yet in force and the European Parliament and Council have the right to express objections.